How to finance a private jet: loans and leases

Cash, debt or lease

Paying cash is simplest and it is what most first-time buyers do below about five million dollars. Above that, debt is normal. Not because buyers lack the money, but because an aircraft is a depreciating asset and tying capital into it carries an opportunity cost that a loan at six or seven per cent often beats.

An operating lease moves the residual value risk to the lessor. You pay for the use of the aircraft over a fixed term and hand it back. It costs more per year and it removes the biggest unknown in ownership, which is what the thing will be worth when you are finished with it.

Who lends against a private jet

Four kinds of lender do most of the business, and they look at the same deal differently.

Private banks lend mostly against the client. If you already hold assets with them, the aircraft becomes one more secured line inside a wider relationship, and the terms can be generous. If you do not, the conversation is short.

Specialist aviation lenders lend against the aircraft. They know the types, they can repossess and resell, and they price that knowledge into the margin. They are the usual route for a buyer without a banking relationship of that size.

Manufacturer finance arms support new deliveries of their own types, sometimes on terms a bank will not match when the order book needs help. Lessors buy the aircraft and lease it to you, which is a different product, covered further down.

Approach two lenders of different kinds. The difference in structure between their offers usually matters more than the difference in rate.

What a lender requires

Typically fifteen to thirty per cent down, a first priority mortgage on the aircraft, an assignment of the insurance, and a personal or corporate guarantee. The aircraft is the collateral, and very few lenders will lend against it alone.

They will also have a view on the aircraft itself. Age limits are common. Many lenders will not finance an airframe that would be over twenty years old at maturity, and out of production types attract shorter terms and lower advance rates because the lender is thinking about how fast they could sell it.

Expect to provide audited accounts or a statement of net worth, the aircraft's specification and maintenance status, the proposed ownership structure, the management agreement if a company will run the aircraft, and the insurance cover. The lender usually commissions its own appraisal of the aircraft, at your cost.

Get financing committed, not indicative, before you sign a letter of intent. An indicative term sheet is a marketing document.

A worked example on a 10 million dollar jet

Take a 10 million dollar aircraft bought with 25 per cent down. The loan is 7.5 million dollars at 7 per cent, amortised as though over twenty years and maturing after ten.

The monthly payment is about 58,000 dollars. At 6 per cent it would be about 54,000, at 8 per cent about 63,000. One point of rate moves the payment by roughly 4,500 dollars a month.

Over the ten years you pay about 7 million dollars in instalments. Only about 2.5 million of it reduces the loan. The other 4.5 million or so is interest. At maturity about 5 million dollars is still owed, two thirds of the original loan, and it falls due in one payment.

That last figure is the one to set against what the aircraft will be worth in ten years. If it is then worth more than 5 million dollars, selling it clears the loan. If it is worth less, you top up the difference or refinance. Our valuation tool shows how each type in the catalogue loses value with age, which is the number to check before you sign.

These figures leave out fees, insurance and the cost of operating the aircraft. They show the shape of the debt, not the full cost of ownership.

Rates, terms and the balloon payment

Pricing is usually quoted over a floating benchmark plus a margin, or as a fixed rate swapped from it. Margins of two to three and a half per cent over the benchmark are ordinary for a well structured deal with a strong borrower.

The structure that catches first-time buyers is the split between term and amortisation. A loan can amortise as though it were being repaid over twenty years, which keeps the monthly payment manageable, but mature after ten. At maturity the remaining balance falls due in one payment. That balance is the balloon, and it is usually a large share of the original loan.

This is not a trap. It is how the market works, and it is perfectly manageable once it is planned for. The two normal outcomes are refinancing the balloon or selling the aircraft to clear it. The version that goes wrong is discovering it in year nine.

Financing a used or older aircraft

Most financed aircraft are used, and lenders are comfortable with that. What they watch is the age at maturity, the maintenance status and whether the type is still supported.

An aircraft approaching an expensive scheduled inspection is worth less to a lender, because that inspection is a cash call the owner might not meet. A recent inspection and engines on a maintenance programme do the opposite: they make the aircraft easier to finance and easier to resell.

Past about fifteen years of age the field narrows. Expect a shorter term, a larger deposit and fewer lenders willing to look.

Leasing: operating, finance, and sale and leaseback

An operating lease is a rental. The lessor owns the aircraft, carries its residual value and takes it back at the end of the term. It suits owners who expect to change aircraft, or who cannot carry the resale risk.

A finance lease is a loan dressed as a lease. You carry the residual value, and at the end you usually buy the aircraft for a set amount. Its tax and accounting treatment differ from a loan, which is often the reason to choose one.

A sale and leaseback releases capital from an aircraft you already own. You sell it to a lessor and keep flying it under a lease. It is a quick way to raise cash, and an expensive one if the lease runs for years.

Ownership structures, registries and tax

Ownership is rarely in a personal name. A company, a trust or a special purpose vehicle is normal, and the right answer depends on where the aircraft is registered, where it is based and who flies in it.

Non-US persons frequently register on the US register through an owner trust, which is an established and entirely legitimate structure. European owners often look at the Isle of Man or Malta for how they handle importation and for the standing of their registries with lenders.

Value added tax is the item most likely to produce an unwelcome surprise. Importing an aircraft into the European Union triggers VAT on the full value unless a specific relief or deferral applies. The position depends on the owner, the use, the country of importation and whether any commercial operation is involved. Settle it with a specialist before the aircraft moves, not afterwards.

We are not tax advisers and no broker is. Take the structure to a specialist in the relevant jurisdiction. That advice costs a rounding error against the cost of getting it wrong.

The order of operations

Talk to lenders before you choose an aircraft, not after. Their appetite for a type, an age and a registry narrows the shortlist.

Get financing committed before you sign a letter of intent, and make the lender's acceptance of the pre-purchase inspection a condition of the deal. A bad finding then releases you from the purchase and the loan together.

Closing happens on a single day. Your funds and the lender's go to the escrow agent, the mortgage is registered at the same moment as the change of ownership, and the aircraft is yours. Allow several weeks between committed terms and closing, most of it spent on documents.